7/24/2011: A9:PC: Glen Ellen branch of the Sonoma Valley Bank.

April 10, 2014, 11:06PM

04/10/2014

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Two critics of bank regulation say the criminal charges announced Thursday following a lengthy investigation into the failure of Sonoma Valley Bank is not an indication the federal government is finally pursuing the executives who contributed to the nation's financial crisis seven years ago.

Not only was Sonoma Valley Bank a tiny player on the national stage, but the critics said the alleged crimes seemed more reminiscent of an earlier fiasco, one that involved the nation's savings and loan companies three decades ago.

Federal regulators have required "zero accountability for any of the elite that actually contributed to the crisis," said William Black, a former banking regulator and now an associate professor of economics and law at the University of Missouri in Kansas City. No one, Black maintained, has yet gone to jail for contributing to a crisis that shook the world's financial systems and brought on a painful recession.

A Look Back At Sonoma Valley Bank's Collapse

7/24/2011: A9:
PC: Glen Ellen branch of the Sonoma Valley Bank.

The Park Lane Villas on Sebastopol Road in Santa Rosa. The mixed-use facility was one of three projects funded by Sonoma Valley Bank and defaulted by Marin County developer Bijan Madjlessi. BETH SCHLANKER/ PD

The Park Lane Villas on Sebastopol Road in Santa Rosa. The mixed-use facility was one of three projects funded by Sonoma Valley Bank and defaulted by Marin County developer Bijan Madjlessi. BETH SCHLANKER/ PD

The Park Lane Villas on Sebastopol Road in Santa Rosa. The mixed-use facility was one of three projects funded by Sonoma Valley Bank and defaulted by Marin County developer Bijan Madjlessi. BETH SCHLANKER/ PD

Former Sonoma Valley Bank CEO Sean Cutting was among four people indicted on fraud charges related to the bank's 2010 collapse on Wednesday, April 9, 2014. PD FILE, 2009

Marin County developer Bijan Madjlessi was indicted on fraud charges connected to the collapse of Sonoma Valley Bank in 2010 on Wednesday, April 9, 2014. PD FILE

7/24/2011: A1: [Greenbriar Condo Conversion]
The Greenbriar Apartments in Petaluma. The complex was one of three projects funded by Sonoma Valley Bank and defaulted by Marin County developer Bijan Madjlessi

1/23/2011: A10: Petaluma Greenbriar Apartments, a failed condo conversion in Petaluma that was spearheaded by developer Bijan Madjlessi, is in various stages of foreclosure. Virtually no improvements were made to the complex during the time Madjlessi received tens of millions of dollars in loans for it, according to residents.
PC: One of the many units in the Greenbriar Apartments in Petaluma where two Marin County investors took out loans for millions of dollars from Sonoma Valley Bank and failed to complete the plan to upgrade and convert the property to condos. The property is now in default. (Please work with Nathan on the captions)

The Park Lane Villas on Sebastopol Ave. in Santa Rosa. The mixed-use facility was one of three projects funded by Sonoma Valley Bank and defaulted by Marin County developer Bijan Madjlessi

7/24/2011: A1:
PC: The former Sonoma Storage Emporium at 4201 Santa Rosa Ave. The building was one of three projects funded by Sonoma Valley Bank and defaulted by Marin County developer Bijan Madjlessi

12/26/2010: E6:
PC: Sonoma Valley Bank is now Westamerica Bank one branch of which is in the Fiesta Plaza shopping center in Boyes Hot Springs.

Sonoma Valley Bank is now Westamerica Bank one branch of which is in the Fiesta Plaza shopping center in Boyes Hot Springs.

Jamey Rice walks into Westamerica Bank which used to be Sonoma Valley Bank. "I am honestly thinking of switching banks," Rice said in response to the shortened hours. "Everyone liked Sonoma Valley Bank but now that it is Westamerica Bank, it isn't the same. It isn't as personal."

7/24/2011: A8:
1/23/2011: A1:
8/24/2010: C6:
PC: The Sonoma Valley Bank branch on Napa St. in Sonoma now has signs of the takeover by West America Bank.

Since 2008, more than 480 U.S. banks have failed, according to the Federal Deposit Insurance Corp. In Sonoma County, Sonoma Valley Bank was the only financial institution taken over by federal regulators. The bank's assets and deposits were purchased in 2010 by Westamerica Bank.

On Wednesday, a top federal official in the Sonoma Valley Bank investigation said that 188 individuals have been charged with crimes related to the use of federal bailout funds that were provided to banks about five years ago.

"Americans should know that SIGTARP (the Special Inspector General for the Troubled Asset Relief Program) is on watch and protecting their bailout dollars," said Special Inspector General Christy Romero.

Black questioned the accuracy of those numbers in light of a Justice Department audit last month that found what it termed "serious flaws" in the statistics that federal prosecutors had compiled on criminal mortgage fraud cases.

For example, in October 2012 U.S. Attorney General Eric Holder announced that 530 criminal defendants had been charged in mortgage losses estimated at $1 billion. But the audit by the department's Office of Inspector General concluded that the number of defendants was actually 107 and the losses amounted to only $95 million.

The financial crisis, said Black, was caused by a combination of "the three most destructive financial fraud epidemics in world history" — exaggerated home appraisals, "liar loans" based on inflated incomes of borrowers, and false representations on the quality of loans packaged and sold as securities.

Prosecutors in the Sonoma Valley Bank case have alleged that bank officials knowingly loaned money so that a developer could regain a condominium project on which he had defaulted — anonymously buying it back for a fraction of the original loan. That is similar to the kind of collusion that savings and loan officials undertook with developers in the 1980s.

"Nothing has really changed," said Stephen Pizzo, a Sebastopol resident and one of the authors of the 1989 book, "Inside Job: The Looting of America's Savings and Loans."

Pizzo suggested that the lack of accountability for banking crime is in some ways understandable.

"They are really hard cases to prosecute," he said.

Prosecutors, he said, must prove fraudulent intent in complicated deals, even as the eyes of the typical juror "glaze over." Moreover, since 9/11 the FBI has shifted so much of its personnel to fighting terrorism that few agents are left to pursue financial crimes.

But the result produces a moral hazard, a chance of lucrative crime with little risk of going to jail. Bank executives, Pizzo said, can conclude that "Man, I could be real rich tomorrow, and the downside is real small."

Two critics of bank regulation say the criminal charges announced Thursday following a lengthy investigation into the failure of Sonoma Valley Bank is not an indication the federal government is finally pursuing the executives who contributed to the nation's financial crisis seven years ago.

Not only was Sonoma Valley Bank a tiny player on the national stage, but the critics said the alleged crimes seemed more reminiscent of an earlier fiasco, one that involved the nation's savings and loan companies three decades ago.

Federal regulators have required "zero accountability for any of the elite that actually contributed to the crisis," said William Black, a former banking regulator and now an associate professor of economics and law at the University of Missouri in Kansas City. No one, Black maintained, has yet gone to jail for contributing to a crisis that shook the world's financial systems and brought on a painful recession.

Since 2008, more than 480 U.S. banks have failed, according to the Federal Deposit Insurance Corp. In Sonoma County, Sonoma Valley Bank was the only financial institution taken over by federal regulators. The bank's assets and deposits were purchased in 2010 by Westamerica Bank.

On Wednesday, a top federal official in the Sonoma Valley Bank investigation said that 188 individuals have been charged with crimes related to the use of federal bailout funds that were provided to banks about five years ago.

"Americans should know that SIGTARP (the Special Inspector General for the Troubled Asset Relief Program) is on watch and protecting their bailout dollars," said Special Inspector General Christy Romero.

Black questioned the accuracy of those numbers in light of a Justice Department audit last month that found what it termed "serious flaws" in the statistics that federal prosecutors had compiled on criminal mortgage fraud cases.

For example, in October 2012 U.S. Attorney General Eric Holder announced that 530 criminal defendants had been charged in mortgage losses estimated at $1 billion. But the audit by the department's Office of Inspector General concluded that the number of defendants was actually 107 and the losses amounted to only $95 million.

The financial crisis, said Black, was caused by a combination of "the three most destructive financial fraud epidemics in world history" — exaggerated home appraisals, "liar loans" based on inflated incomes of borrowers, and false representations on the quality of loans packaged and sold as securities.

Prosecutors in the Sonoma Valley Bank case have alleged that bank officials knowingly loaned money so that a developer could regain a condominium project on which he had defaulted — anonymously buying it back for a fraction of the original loan. That is similar to the kind of collusion that savings and loan officials undertook with developers in the 1980s.

"Nothing has really changed," said Stephen Pizzo, a Sebastopol resident and one of the authors of the 1989 book, "Inside Job: The Looting of America's Savings and Loans."

Pizzo suggested that the lack of accountability for banking crime is in some ways understandable.

"They are really hard cases to prosecute," he said.

Prosecutors, he said, must prove fraudulent intent in complicated deals, even as the eyes of the typical juror "glaze over." Moreover, since 9/11 the FBI has shifted so much of its personnel to fighting terrorism that few agents are left to pursue financial crimes.

But the result produces a moral hazard, a chance of lucrative crime with little risk of going to jail. Bank executives, Pizzo said, can conclude that "Man, I could be real rich tomorrow, and the downside is real small."